The returns buy and hold investors have enjoyed over the past 10 years have largely fueled the boom in passive index funds, and that makes sense. When you can “set it and forget it” and watch your money rise almost every single year by double-digits (2018’s -4.5% return was the first negative year for the S&P 500 since 2008), then making money in the market seems easy.

But as the saying goes “the easy money” has largely been made. This means that going forward investing isn’t going to be nearly as lucrative as it has been for the past decade, including for many newer investors who have yet to experience a bear market or recession.

Worse still, many analysts are now warning that stocks might not just deliver worse returns, but potentially flat or even negative ones over the coming 10 years. In other words, we might be set for a “lost decade” in stocks.

So let’s take a look at why these experts are warning investors to expect little in terms of capital gains, but more importantly, discover three ways to avoid having your portfolio spin its wheels even if these dour predictions prove true.

Why the Stock Market Might Be Set for a “Lost Decade”

A lost decade is when stocks go nowhere for 10 years. Since the stock market never rises or falls in a straight line these are usually a result of two major bear markets created by periods of severe overvaluation that can leave unsuspecting buy and hold investors shellshocked by how long their portfolios can end up going nowhere.

For example, anyone who invested blindly at the peak of the tech bubble (into index funds) and then never dollar cost averaged down during the bear market that followed (3rd worst in 50 years), would have been staring at significant losses in March 2009.

The tech bubble was so severe (with the Nasdaq plunging 80% from 2000 to 2003) that tech stocks didn’t achieve breakeven on an inflation-adjusted basis until 2019, nearly two decades later. And that’s after a 500% rally over the last decade.

It’s important to remember that fundamentally the stock market is purely a function of two things, earnings and cash flow growth (what intrinsic values are based on), and valuation.

Thus starting valuation is very important, with a 2016 Yale study finding that starting PE has a very large effect on total returns over the next 30 years. After a 10-year bull market valuations according to some models are now highly stretched and forecasting very weak or even negative returns over the coming decade.

(Source: Market Watch)

There are four famous valuation ratios that many investors like to use to estimate future long-term returns. These are the Shiller CAPE, Tobin Q, Buffett, and Jones Composite ratios.

Shiller CAPE: uses 10-year average inflation-adjusted earnings to create a version of the famous PE ratio.

Buffett Ratio: Stock Market value/GDP which Buffett has publicly said is “probably the best single measure of where valuations stand.”

As you can see in the above chart these four models are predicting annualized S&P 500 total returns ranging from -4.1% to 2.6% through the end of 2028.

Of course, these four models are not to be taken as gospel truth, because each has its own inherent limitations based on how they are constructed. Various other analysts have long-term forecasts of their own including

I personally use a valuation-adjusted total return model based on the Gordon Dividend Growth Model (relatively effective since 1954). This is forecasting that the S&P 500 is likely to deliver about 2% yield + 6.4% long-term dividend growth – 0.3% valuation boost (based on forward PE vs 20-year average forward PE) = 8.0%.

But while each analyst firm and famous model has its own forecasts, one thing is clear. Investors are nearly certain to see MUCH weaker future returns compared to the 18% CAGR they’ve enjoyed over the past decade.

And 2018 taught many investors the truth of the old maxim “stocks take the escalator up but the elevator down.” In December there was a three week period where stocks plunged 17% and ended up closing down 19.8% from their all-time-high on December 24th. This nearly ended the decade long bull market and was the strongest correction since 2008.

The point is that, while I can’t tell you certainty what the market will do over the next decade, two things are nearly certain. First, returns will be far weaker AND there will be plenty of gut-wrenching declines.

But fortunately, there are three things you can do to protect your wealth, grow it, and achieve your financial dreams, even if the broader stock market’s returns suck over the coming decade.

3 Ways You Can Protect Your Portfolio and Grow Your Wealth Even If Stocks Go Nowhere for 10 Years

The biggest reason lost decades happen at all is due to overvaluation. As you can see from the chart below, prepared by Ben Carleson (Wealth of Common Sense) since 1926 the SP 500’s 35-year rolling returns have never gone below 8%.

That has two important implications. The first is that long-term investing (such as over 35 years) is as close to a guaranteed way to grow wealth as you can get.

But the second and more important one is that valuation is perhaps the most important determinant of market returns. Note that investors who invested at the bottom of the Great Depression lows enjoyed 35 years of about 15% CAGR total returns. Those that bought at the 1929 high still saw 8% returns but that was half as good due to the highest valuation in US history to that point (combined with the Great Depression).

As Mr. Carson points out in a recent article, the S&P 500’s total returns between 2000 and 2019 have been 4.9% CAGR. In 2000 the market’s valuation was the highest it’s ever been and in order for the 2000 to 2034 period to avoid being the worst in US history, stocks would need to rise 12% CAGR for the next 16 years.

Since that’s nearly impossible this will mean that 2000, the height of the tech bubble, was literally the worst time you could have ever invested in US stocks.

Now I’m a stock picker by profession and choice (for my own portfolio). I like to control what companies I own, and so don’t use index funds. But if you do, then try to avoid obvious periods of market overvaluation, like January 2018 when the S&P 500’s forward PE was 18.3 vs a 20-year average of 16.0.

Today the S&P 500’s forward PE is 16.2 which indicates stocks are about fairly valued and so buying low-cost index funds is OK as long as you have a long time horizon and the right asset allocation.

Those watchlists are built on dividend yield theory or DYT. That’s the only approach that asset manager/newsletter publisher Investment Quality Trends has been using on blue-chip dividend stocks since 1966.

According to Hulbert Financial Digest (which tracks almost all investing newsletters) IQT’s 30-year risk-adjusted returns are the literally the best in the industry. DYT merely compares a stock’s yield to its long-term historical average (5+ years) because unless a thesis breaks, yields revert to their historical norms which approximate fair value.

But even if you’re using the right strategy for picking quality companies (at good to great prices) that won’t help you if you have the wrong asset allocation.

Asset allocation is just the mix of assets you own, such as stocks, bonds, and cash equivalents (savings accounts or short-term Treasury bills).

While stocks have historically offered the highest returns (the best performing asset class in history) owning 100% stocks can be a recipe for disaster.

That’s because since 1926 bear markets typically last three years, measured from market peak to a new all-time high. The average bear market (no recession has ever seen the market not fall into one) sees stocks fall for 13 months, before bottoming 30% from the last all-time high. But averages are just that, averages that can serve as a rough guide to what will likely happen.

In the Great Recession, stocks fell 57% peak to trough and took over five years to fully recover. In 2000 the market got cut in half and took 4.5 years to make new highs.

The longest bear market recovery time was 69 months or nearly six years after the market fell about 50% in 1973.

If you’re a retiree, or simply have 100% of your assets in stocks, then when you need the money for spending purposes, you’ll become a forced seller, realizing potentially catastrophic losses. But if you have three years worth of spending needs in cash (I recommend the ETF MINT, an ultra-short duration T-Bill ETF), then you will be able to pay the bills and not sell great companies at ludicrously low prices (precisely when future returns are the greatest).

What if the next bear market is like 1973, 2000 or 2007 and takes 4 to 6 years for stocks to claw their way back to breakeven? Well, that’s where long-term Treasury bonds come in ( I personally recommend the ETF VGLT).

As you can see both T-bills (cash) and long-term Treasuries do well during years of recession and periods of falling stocks. That makes sense since investors are fleeing crashing stocks (a risk asset) for risk-free Treasuries. Long bond funds do very well because falling interest rates combine with very long duration (how much a bond appreciates in value per 1% decline in interest rate) to deliver solid counter-cyclical returns compared when equities are declining.

And lest you think that bonds are just for older investors, know that I plan to use both cash and bonds to profit from the next recession and bear market. That’s right, even a die-hard 100% focused stock investor has cash and bonds as part of his long-term asset allocation strategy.

But other than buying quality undervalued companies and only for the stock portion of your portfolio (your proper equity allocation will depend on your age, goals, and risk tolerance), there is one other strategy you can use to beat a lost decade in stocks.

Dividend growth stocks not just beat the market over time (and with lower volatility) but during a lost decade are one of the best investing strategies you can use. Think about it like this.

If the market ends up flat between 2018 and 2028 then a portfolio that beats the S&P 500’s 2% yield is going to be a godsend, for several reasons. For example, my Deep Value Dividend Growth Portfolio (the strategy I intend to use for all my savings for the rest of my life) has the following stats:

While I fully expect that portfolio, which is packed to the rafters with above average quality blue-chips including dividend kings and aristocrats, to handily beat the market over time, I’m getting paid 1% per quarter in cash, and those dividend payments are growing at double-digits.

In other words, total returns from dividends alone on this portfolio will be about 7.2% annually, which is much higher than what most analysts expect the market to deliver. If my portfolio’s value were to stay flat the entire time, I still make a great return BUT pretty much everything I own in that portfolio is a coiled spring that will appreciate in value simply from the company’s returning to fair value

Basically, the best ways to do well no matter the market has in store (including during a lost decade) is to set yourself up for success by using strategies that have proven over decades to be proven ways to exponentially grow your wealth (and beat the market as well).

Investing in quality dividend growth stocks that will ensure you a good return even the if share prices of your companies don’t budge for 10 years.

Use the right asset allocation to ensure that your stock strategies have time to work and you don’t have to sell at the worst time to pay the bills (asset allocation)

Bottom Line: These 3 Strategies Can Help You Do Well Even Stocks Suffer a “Lost Decade”

Don’t get me wrong, I’m not necessarily saying I agree with some of these models, or the more bearish forecasts such as GMO’s call for stocks to fall 4% CAGR in the coming decade.

Every long-term forecast is based on models and future growth assumptions, and these are educated guesstimates at best. My personal valuation-adjusted total return model, based on what’s worked well since 1954, estimates 8% CAGR returns over the next decade.

But even if my more bullish outlook proves true, that’s still less than half the returns investors have enjoyed over the past 10 years. Worse still, stocks never rise or fall in a straight line, which means that those returns are likely to be interspersed with big corrections, and likely a full-on bear market (next recession could be coming in 2020 or 2021).

To protect your wealth, portfolio, and long-term financial dreams I recommend three things

Use the appropriate asset allocation (mix of stocks/bonds/cash) that can most likely get you to your long-term goals and avoid making costly mistakes like becoming a forced seller in a bear market.

Own quality, recession-resistant dividend growth stocks, who pay safe and exponentially rising income pay you no matter what the market is doing.

Always try to buy the best-undervalued stocks at any given time, something great is always on sale and undervalued companies are coiled springs that will help you achieve market-beating returns over time.

While there are no guarantees on Wall Street, these three strategies can help you maximize your returns not just in 2019 or the next few years, but over the next decade. What’s more, they can help you sleep well at night even during a bear market and ensure that your long-term financial goals (like a prosperous retirement) aren’t sunk by a lost decade for stocks that might be coming.